Alternative funds for PSU banks in offing

Reserve Bank free to issue bank licences

The government proposes to allow state-run banks to mobilise capital through issue of perpetual bonds, route pension and insurance funds.

Finance minister P Chidambaram hinted on Wednesday that such new and innovative sources must be explored to expand the capital base of government owned banks.

Though there is no decision yet, the suggestion is that regulators revisit regulations to ensure pension and insurance funds invest in perpetual bonds issued by public sector banks, Chidambaram said.

“PFRDA has already made some changes… We are talking to Irda,” he said, adding that banks may look at issue of shares to employees as well, through which significant capital can be raised.

Another suggestion that figured at a meeting Chidambaram had with public sector banks chief executives was that minority shareholders be allowed rights issue whenever the government infuses fresh capital so that their share too goes up proportionately.

“We discussed (banks capital issue). Some ideas were thrown up. Hopefully, we will take it forward. I will discuss with RBI board day after tomorrow,” Chidambaram said.

He reiterated the government stand that banks should be allowed to issue fresh capital by retaining their earnings. But, unless banks are profitable after dividend, wages and taxes, they would not be able to retain major part of profits.

This financial year, the government had set aside Rs 14,000 crore for recapitalising PSU banks and the proposal in the interim budget for 2014-15 was to infuse an additional Rs 11,300 crore. This amount is inadequate considering the capital requirement of PSU banks. Innovative methods would help banks next financial year, he said.

But, all public sector banks met the Basel norms with regard to capital adequacy and some of them fell short of the more stringent RBI norm that was 1 per cent higher at 9 per cent.

Chidambaram said increasing non-performing assets of PSU banks was a matter of concern and directed them to focus on recovery of bad loans that happened to be high among large corporate accounts.

He said that credit disbursal to medium-sized industry had declined and was “satisfactory” in the agricultural sector.

“The biggest challenge facing the public sector banks is NPAs and their asset qualities,” he said, adding that a large part of the meeting with banks’ chiefs was focused on bad loans and the steps needed for recovery.

State-run banks’ bad loans are expected to be slightly higher by March-end from a year earlier, he said. PSU banks have recovered bad loans worth 18,933 crore between April and December 2013.

United Bank of India, in particular, saw a huge surge in NPAs, triggering worries over its capital needs. Chidambaram said the United Bank of India issue would be discussed separately when he meets RBI governor Raghuram Rajan on Friday.

However, he said the UBI had managed to recover Rs 1,200 crore NPA in January and February.

NPAs of PSU banks rose by 28.5 per cent from Rs 1.83 lakh crore in March 2013 to Rs 2.36 lakh crore in September last year. But, bankers pegged the figure far higher than that declared by RBI.

Chidambaram said a clear picture of NPAs would emerge only at the end of the year and any figures seen in the middle of the year would give a misleading picture. Banks have been monitoring their top 30 bad loan accounts for quite some time now.

He said one reason for higher NPA numbers was that they were system generated and cannot be hidden in books, as was the case a few years ago. “What is reported now is more accurate,” he claimed.

Chidambaram said there was forward movement with regard to disbursement of loans for power projects in Andhra Pradesh, Arunachal Pradesh, Madhya Pradesh and Maharashtra. Disbursement for a couple of road projects too had started, apart from the Hyderabad metro project, he said.

On new bank licences, he did not see the model code of conduct coming in the way, as it was a normal function of government and regulator.

“What has code of conduct to do with normal function of the government and regulator? This is the indication we have got… We are not interfering. It will be RBI’s decision (on who gets licence),” he argued.

He also said, “There is a misconception on what government can do. The government’s normal business functioning will be unaffected. Cabinet meetings will take place right up to the end. There are restrictions (because of) code of conduct and we will observe that,” he said.

Asked about the curbs on import of gold, he said the government would revisit the customs duty only after factoring in the final current account deficit (CAD) numbers for the 2013-14.

Chidambaram said the government would convene a meeting of telecom service providers and the Indian banks’ association to discuss measures to increase the penetration of mobile banking services by adopting new technology called USSD.

He said the foreign investment promotion board (FIPB) would continue to take decisions on investment proposals and the government would not come to a halt because of Lok Sabha elections.